TD Ameritrade Dives into Thinkorswim

With options fast becoming part of mainstream investing and driving profits for online brokers, TD Ameritrade's proposed purchase is saner than it first appears

By David Bogoslaw

You would think that the widespread market carnage over the past year or more would be enough to scare most retail investors away from risky investments like options, but that's not the signal being sent by TD Ameritrade's (AMTD) proposed cash-and-stock deal, valued at $606 million, to acquire online options broker Thinkorswim Group (SWIM), announced on Jan. 8. Ameritrade is the No. 2 online broker in terms of market capitalization, behind Charles Schwab (SCHW).

Options trading is the fastest-growing segment of the online brokerage industry, and while options certainly aren't appropriate for the unschooled or less sophisticated investors, they can help investors protect their portfolios in declining markets. And investor education tools such as those offered by Thinkorswim have helped arm more investors with the confidence they need to wade, if not dive, into these murky waters.

The fact is, options are currently the most profitable segment of the online brokerage world, and options-dedicated firms like OptionsXpress (OXPS), the largest independent options brokerage, and Thinkorswim have been doing well even through the markets' declines, according to Robert Ellis, senior vice-president of the wealth management group at Celent, a Boston-based financial research and consulting firm. Active online traders "took advantage of the market declines using options in a way that buy-and-hold investors couldn't," he says.

Options Trading Goes Mainstream

The merger of options education Web site Investools and online broker Thinkorswim nearly two years ago was greeted with a lot of skepticism in the market, but the combined company's success has been proof of the synergies that exist between education and trading activity, says Richard Fetyko, an analyst at Merriman Curhan Ford (MERR). Those synergies have enabled Thinkorswim to grow its trading volume at a faster pace than either OptionsXpress or TD Ameritrade, he adds.

"I think that combination has gotten the attention of some of the larger online brokers and also acknowledgement that options trading is no longer purely a speculative trading strategy for high-end retail investors, that it's becoming more mainstream," he says.

And that realization has companies like Ameritrade and Schwab scrambling to fortify their platforms' ability to trade options, in response to the loss of market share to stronger options platforms like Thinkorswim in recent years, he says.

One reason that options volume has grown 25% annually on average for the past 10 years is increasing awareness that options can help investors better manage their risk and add income to their portfolios, says David Fisher, chief executive at OptionsXpress. One of the more conservative strategies that beginning options investors use is the purchase of puts, which give holders the right but not the obligation to sell a stock at a specified price above where it has fallen. A second one is selling covered call contracts against existing stock positions in your portfolio to generate income even if stock prices aren't moving up, with high levels of volatility pushing up prices on calls, says Fisher. "It's easy to show people in this market how [these transactions] make sense," he says.